Published On: Sun, Jun 7th, 2009

Stock Exchange Of Hong Kong Pre Opening Session

hkexlogo2The Stock Exchange of Hong Kong (SEHK) is of the order-driven exchange type like the NYSE in the US or the TSE in Tokyo (or Toronto for us Canadians). And like those exchanges has their own specific order types in which trading securities takes place. Additionally, like their counterparts in the US and Tokyo the SEHK offers a pre-opening session, a continuous auction session and a closing auction session each with its own unique order-type terminology and execution expectations.

The pre-opening session which is the focus of this article offers just 2 order types “at-auction” and “at-auction limit orders”. Each of these orders rank in terms of priority and aren’t necessarily accepted throughout the entire pre-opening session which runs for 30 minutes from 9:30am to 10:00am. The pre-opening session is further broken down into 4 distinctive periods: the Order Input Period (9:30:00am to 9:44:59am), the Pre-order Matching Period (9:45am to 9:49:59am), the Order Matching Period (9:50am to 9:57:59am) and finally the Blocking Period (9:58am to 9:59:59am).

The purpose of the pre-opening session is to allow the exchange to establish an optimal opening price which maximizes order matching when the regular or Continuous Trading Session begins at 10:00:00 am. There are other benefits too such as reducing the load on the exchanges trading system (AMS/3 – Third Generation Automatic Order Matching and Execution System) by spreading order entry over 30 minutes. It also helps prevent price fluctuation and manipulation at the beginning of the Continuous Trading Session too.

During the Order Input Period from 9:30:00am to 9:44:59am both at-auction orders and at-auction limit orders can be submitted. They can also be canceled and modified. At-auction orders are entered without a price and are akin to market orders. Where as at-auction limit orders must be sent with a specified price. There is no short selling allowed during this period. Also, the Indicative Equilibrium Price (IEP) and the Indicative Equilibrium Volume (IEV) can then be calculated and are displayed continuously until the opening at 10:00am. Just in case it’s not clear the IEP is the price at which the maximum number of shares can be traded and the IEV is the number of shares that would be traded at the IEP.

quotes1During the Pre-order Matching Period from 9:45am to 9:49:59am only at-auction orders are the only acceptable order type. Also you can not cancel or modify any orders entered during the Order Input period or in the Pre-order Matching Period. And again short selling is not allowed.

The purpose of the restrictions in the Pre-order Matching Period is to prevent large fluctuations of the IEP during the Order Matching Period by allowing traders to pull orders at the last second. Secondly, the IEP will adjust to its fair value market price and attract more at-auction orders.

The the Order Matching Period from 9:50am to 9:57:59am allows for no new orders, modifications or cancellations. Order are matched at a Single Price Auction or the final IEP with at-auction orders having priority over at-auction limit orders under the price then time priority scheme. Any outstanding at-auction orders are canceled and at-auction limit orders are converted to limit orders to be carried forward in the Continuous Trading Session provided they are within 9 spreads of the final IEP. Clients who place orders far off the market within the pre-opening period will have to resend. It might be a good idea to suggest to them to place these orders in the regular session instead.

All executions done at this time are then reported back to the respective Exchange Participant and the final price and aggregated volume executed will be reported with trade type “U”. In your Bloomberg type “5.HK ‹EQUITY› QRM ‹GO›”. Scroll to 9:57:59am and you will see a “U”.

The Blocking Period 9:58am to 9:59:59am is really just a break between the Pre-opening session and the Continuous Trading Session. No order types of any kind are accepted and cancellation of the outstanding at-auction limit orders are not allowed. You will have to decide to let the clients orders reject back to them from the exchange or capture them in some trade staging process to be sent at the open. Be warned that if they reject the client may trade away to a competitor who offers a trade staging service and assume your platform is broken. My favourite is the PHD quant who complains when the order is rejected and blames the broker when in fact they can’t even tell time.

It rejected! Trade away. Odd lot broker

Anyone have a funny sell-side anecdote they can share?

An example of the the pre-opening matching logic can be found HERE.

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